UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTER ENDED MARCH 25, 2000
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from _____ to _____
Commission file number 0-16473
SSE TELECOM, INC.
(Exact name of registrant as specified in its charter)
Delaware 52-1466297
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
47823 Westinghouse Dr.
Fremont, California 94539
(Address of principal
executive office)
Registrant's telephone number, including area code:
(510) 657-7552
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes X No
--- ---
As of May 8, 2000, the following number of shares of each of the issuer's
classes of common stock were outstanding: Common Stock 5,989,951
<PAGE>
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
<TABLE>
SSE Telecom, Inc.
Condensed Consolidated Balance Sheets
(in thousands, except per share amounts; unaudited)
<CAPTION>
March 25, September 25,
2000 1999
-------- --------
<S> <C> <C>
Assets
Current Assets:
Cash and cash equivalents $ 4,074 $ 3,828
Short-term investments 8,476 4,523
Accounts receivable (net of allowances of $523 and $584) 3,485 4,337
Related party accounts receivable 41 17
Inventories 3,741 4,184
Deferred tax assets 2,723 2,723
Other current assets 308 247
-------- --------
Total current assets 22,848 19,859
Property, equipment and leasehold improvements, at cost
Equipment 7,296 7,148
Furniture, fixtures and leasehold improvements 4,508 4,659
-------- --------
11,804 11,807
Less accumulated depreciation and amortization 9,981 9,298
-------- --------
Property, equipment and leasehold improvements, net 1,823 2,509
Notes receivable from employees 140 140
-------- --------
Total assets $ 24,811 $ 22,508
======== ========
Liabilities and Stockholders' Equity
Current Liabilities:
Line of credit $ -- $ 907
Accounts payable 3,044 2,689
Related party accounts payable 636 601
Accrued salaries and employee benefits 980 753
Warranty 1,812 2,312
Other accrued liabilities 194 138
Current portion of capital lease liability 108 109
-------- --------
Total current liabilities 6,774 7,509
Deferred tax liabilities 3,852 2,029
Capital lease liability 140 200
Stockholders' Equity:
Common stock $.01 par value per share (30,000,000 shares
authorized; 6,191,925 and 6,107,457 shares issued) . 62 61
Additional paid in capital 13,035 12,739
Treasury stock (at cost, 224,643 shares) (1,782) (1,782)
Accumulated deficit (1,914) (242)
Accumulated other comprehensive income 4,644 1,994
-------- --------
Total stockholders' equity 14,045 12,770
-------- --------
Total liabilities and stockholders' equity $ 24,811 $ 22,508
======== ========
<FN>
The Notes to Condensed Consolidated Financial Statements
are an integral part of these statements.
</FN>
</TABLE>
2
<PAGE>
<TABLE>
SSE Telecom, Inc.
Condensed Consolidated Statements of Operations
(in thousands, except per share data; unaudited)
<CAPTION>
Three Months Ended Six Months Ended
------------------------- --------------------------
March 25, March 27, March 25, March 27,
2000 1999 2000 1999
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Revenue $ 3,945 $ 4,718 $ 8,816 $ 12,422
Cost of revenue 3,814 4,966 8,160 12,173
-------- -------- -------- --------
Gross profit (loss) 131 (248) 656 249
Operating expenses:
Research and development 993 957 1,921 1,951
Marketing, general and administrative 1,853 2,062 3,729 4,037
-------- -------- -------- --------
Operating loss (2,715) (3,267) (4,994) (5,739)
Gain on sale of investments 1,680 -- 3,332 3,198
Net interest expense 16 (29) (20) (49)
Other income 5 128 10 211
-------- -------- -------- --------
Loss before income taxes (1,014) (3,168) (1,672) (2,379)
Income tax benefit -- (1,310) -- (1,034)
-------- -------- -------- --------
Net loss $ (1,014) $ (1,858) $ (1,672) $ (1,345)
======== ======== ======== ========
Basic and diluted net loss per share $ (0.17) $ (0.32) $ (0.28) $ (0.23)
======== ======== ======== ========
Shares used in per share calculation - basic and diluted 5,936 5,791 5,919 5,785
======== ======== ======== ========
<FN>
The Notes to Condensed Consolidated Financial Statements are an integral part of these statements.
</FN>
</TABLE>
3
<PAGE>
<TABLE>
SSE Telecom, Inc.
Condensed Consolidated Statements of Cash Flows
(in thousands; unaudited)
<CAPTION>
Six Months Ended
----------------------------
March 25, March 27,
2000 1999
------- -------
<S> <C> <C>
Operating Activities:
Net loss $(1,672) $(1,345)
Adjustments to reconcile net loss to net
cash used by operating activities:
Depreciation and amortization 695 680
Gain on sale of investments (3,332) (3,198)
Deferred income taxes -- 26
Changes in operating assets and liabilities:
Accounts receivable 828 516
Inventories 443 1,399
Other current assets (61) (16)
Accounts payable 390 (577)
Other accrued liabilities (217) (606)
------- -------
Net cash used by operating activities (2,926) (3,121)
------- -------
Investing activities:
Purchases of equipment (8) (275)
Proceeds from sale of investments 3,851 3,419
------- -------
Net cash provided by investing activities 3,843 3,144
------- -------
Financing activities:
Net payment under debt obligations (968) (992)
Payments on convertible debentures -- (1,220)
Proceeds from issuance of common stock 297 55
------- -------
Net cash used by financing activities (671) (2,157)
------- -------
Net increase (decrease) in cash and cash equivalents 246 (2,134)
Cash and cash equivalents, beginning of period 3,828 3,327
------- -------
Cash and cash equivalents, end of period $ 4,074 $ 1,193
======= =======
<FN>
The Notes to Condensed Consolidated Financial Statements are an integral part of these statements.
</FN>
</TABLE>
4
<PAGE>
SSE TELECOM, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
1. CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
The unaudited condensed consolidated financial statements included herein
contain all adjustments, consisting only of normal recurring adjustments which,
in the opinion of management, are necessary to fairly state the consolidated
financial position, results of operations and cash flows of SSE Telecom, Inc.
("SSET" or the "Company") for the periods presented.
Certain information and footnote disclosures normally included in financial
statements prepared in accordance with generally accepted accounting principles
have been condensed or omitted. It is suggested that these interim condensed
consolidated financial statements and notes thereto be read in conjunction with
the audited consolidated financial statements and notes thereto included in
SSET's Annual Report on Form 10-K for the fiscal year ended September 25, 1999.
Interim results of operations are not necessarily indicative of the results to
be expected for the fiscal year ending September 30, 2000.
2. INVENTORIES
March 25, September 25,
2000 1999
-------- -------
(in thousands)
Raw materials $ 1,420 $ 2,030
Work-in-process 1,766 1,521
Finished goods 555 633
-------- -------
Total $ 3,741 $ 4,184
======== =======
3. INVESTMENTS
On March 23, 2000, Echostar Communications Corporation ("Echostar")
effected a 2-for-1 split of its series A common stock for stockholders of record
at the close of business on March 10, 2000. All share information in this report
has been restated to reflect the split. During the quarter ended March 25, 2000,
SSET sold 30,000 shares of Echostar common stock for a net realized gain before
taxes of $1.7 million. The proceeds generated from the sale totaled
approximately $1.9 million. For the six month period ended March 25, 2000, SSET
sold 90,800 shares of Echostar common stock for a net realized gain before taxes
of $3.3 million. Proceeds generated from these sales in the first half of fiscal
2000 totaled approximately $3.9 million. In the second half of fiscal 1999, SSET
sold Echostar common stock for a net realized gain before taxes of $3.2 million.
At March 25, 2000, SSET had 111,344 shares of Echostar common stock valued at
$8.5 million.
4. PER SHARE COMPUTATION
Basic net loss per share is computed by dividing net loss available to
common stockholders by the weighted average number of common shares outstanding
for the period. Diluted net loss per share is computed using the weighted
average number of common and potentially dilutive common shares outstanding
during the period. For the three and six months ended March 25, 2000,
potentially dilutive options and warrants to purchase 755,282 and 579,454
shares, respectively, were excluded from the diluted per share calculation as
they were antidilutive due to net losses experienced in these periods.
Similarly, 13,225 and 14,670 potentially dilutive options were excluded from the
diluted per share calculation for the comparable periods in fiscal 1999 due to
net losses incurred.
5
<PAGE>
5. COMPREHENSIVE INCOME
<TABLE>
The components of comprehensive loss are as follows:
<CAPTION>
Three Months Ended Six Months Ended
------------------------- --------------------------
March 25, March 27, March 25, March 27,
2000 1999 2000 1999
------- ------- ------- -------
(in thousands)
<S> <C> <C> <C> <C>
Net loss $(1,014) $(1,858) $(1,672) $(1,345)
Other comprehensive income (loss) 1,192 1,164 2,650 (654)
------- ------- ------- -------
Total comprehensive income (loss) 178 (694) 978 (1,999)
======= ======= ======= =======
</TABLE>
6
<PAGE>
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
Information contained in this Form 10-Q that is not historical fact,
including any statements about expectations for the fiscal year and beyond,
involve certain risks and uncertainties. This Form 10-Q contains
"forward-looking" statements within the meaning of the Private Securities
Litigation Reform Act of 1995, many of which can be identified by the use of
forward-looking terminology such as "may", "will", "believe", "expect",
"anticipate", "estimate", "plan", "intend", or "continue" or the negative
thereof or other variations thereon or comparable terminology. There are a
number of important factors with respect to such forward-looking statements that
could cause actual results to differ materially from those contemplated in such
forward-looking statements. Numerous factors, such as economic and competitive
conditions, incoming order levels, timing of product shipments, product margins,
new product development, and reliance on key vendors and consumers and
international sales could cause actual results to differ from those described in
these statements and current and prospective investors and stockholders should
carefully consider these factors in evaluating these forward-looking statements.
RESULTS OF OPERATIONS
Overview
Revenue for the second quarter of fiscal 2000 decreased $773,000, or 16%,
to $3.9 million from $4.7 million in the second quarter of last fiscal year.
Revenue for the first quarter of fiscal 2000 was $4.9 million. New orders in the
second quarter of fiscal 2000 decreased approximately 32% from the first quarter
of fiscal 2000, as evidenced by the Company's backlog of $2.2 million and $3.0
million at March 25, 2000 and December 25, 1999. Timing differences from quarter
to quarter as to the receipt of large orders and changes in factory production
make meaningful quarter to quarter comparisons of backlog difficult.
During the second quarter of fiscal 2000 the Company continued to be
affected by unfavorable economic conditions impacting satellite communications
business in Latin America, Asia and Eastern Europe. Additionally, strong demand
for certain electronic components used in current products has resulted in
material shortages at contract manufacturers and negatively impacted our
manufacturing cycle times. This resulted in delays in deliveries and loss of
some orders, further reducing our revenue. Management believes the material
shortages have been resolved and that manufacturing lead time and finished goods
availability are returning to satisfactory levels. However, there can be no
assurance that these or other manufacturing problems will not recur, that
significant volumes of product can be produced in a timely manner or that orders
will increase.
The Company is continuing its investment in the development of the iP3TM
satellite Internet gateway product line. The Company released basic versions of
this product to two prospective European customers for evaluation and testing
during the first quarter of fiscal 2000, and to a potential domestic customer in
the second quarter of fiscal 2000. Beta testing by the foreign customers was
satisfactorily completed during the second quarter. The final phase of beta
testing is currently ongoing by the domestic customer. As a result of these
programs certain product feature enhancements are underway. To date, SSET has
received no commercial orders for this product line and no assurance can be
given that design or production problems will not arise. To the extent that
development and commercialization efforts with respect to the iP3TM product line
are unsuccessful, or if these products do not achieve market acceptance, SSET's
business, financial condition and results of operations would be materially
adversely affected.
The Company's financial position as of March 25, 2000 has improved in
comparison to the end of last fiscal year due, in part, to the increase in value
of the Company's investment in Echostar. The Company's cash position was $4.1
million, inventories were reduced to $3.7 million, and short-term investments
were $8.5 million as of March 25, 2000.
Results of Operations for the Three and Six Month Periods Ended March 25, 2000
and March 27, 1999
Revenue: Revenue decreased by 16% from $4.7 million for the three months
ended March 27, 1999 to $3.9 million for the three months ended March 25, 2000,
and decreased by 29% from $12.4 million for the six months ended March 27, 1999
to $8.8 million for the six months ended March 25, 2000. The decrease is
primarily a result of
7
<PAGE>
lower unit volumes due to the aforementioned lower demand in the market for
satellite transceivers and modems in Latin America, Asia and Eastern Europe and
to material shortages. Also contributing to the decrease was a reduction in
orders and shipments to the U.S. government. Management currently expects that
revenue from existing products will remain at approximately the level
experienced during the second quarter of fiscal 2000 for the remainder of the
current fiscal year. We are unable to predict with any degree of certainty what
revenue, if any, will result from shipments of the new iP3TM product line.
Gross Profit: Gross profit increased $379,000 from a loss of $248,000 for
the three months ended March 27, 1999 to gross profit of $131,000 for the three
months ended March 25, 2000, and increased $407,000 from $249,000 for the six
months ended March 27, 1999 to $656,000 for the six months ended March 25, 2000.
As a percentage of revenue, gross profit was (5)% and 3% for the second quarter
of 1999 and 2000, respectively, and 2% and 7% for the first six months of 1999
and 2000, respectively. The gross margin increase is primarily due to cost
reductions resulting from the Company's reorganization of manufacturing,
including outsourcing the assembly of certain products and components and a
consolidation of the Company's manufacturing into one facility. These cost
reductions have been partially offset by a decrease in unit volume.
Operating Expenses: Research and development expenses increased 4% from
$957,000 for the three months ended March 27, 1999 to $993,000 for the three
months ended March 25, 2000, and decreased 2% from $2.0 million for the six
months ended March 27, 1999 to $1.9 million for the six months ended March 25,
2000. Research and development expenses as a percentage of revenue were 20% and
25% for the second quarter of 1999 and 2000, respectively, and were 16% and 22%
for the first six months of 1999 and 2000, respectively. Marketing, general and
administrative expenses decreased 10% from $2.1 million for the three months
ended March 27, 1999 to $1.9 million for the three months ended March 25, 2000,
and decreased 8% from $4.0 million for the six months ended March 27, 1999 to
$3.7 million for the six months ended March 25, 2000. Marketing, general and
administrative expenses as a percentage of revenue were 44% and 47% for the
second quarter of 1999 and 2000, respectively, and 32% and 42% for the first six
months of 1999 and 2000, respectively. The small decrease in operating expenses
was due to lower average headcount. However, operating expenses are expected to
increase in absolute dollars in the remaining quarters of fiscal 2000 as overall
headcount is increased in order to support iP3TM development and marketing.
Net Interest Expense. Net interest income was $16,000 in the second quarter
of fiscal 2000 as compared to net interest expense of $29,000 during the same
period of last fiscal year. For the first six months of fiscal year 2000
interest expense was $20,000 as compared to $49,000 for the same period last
year. Interest expense for fiscal 2000 has decreased due primarily to lower
average debt balances as compared to fiscal 1999.
Net Gain on Sale of Investments. During the second quarter of fiscal 2000
the Company realized a gain of $1.7 million on sales of 30,000 shares of
Echostar common stock. For the first six months of fiscal 2000 the Company
realized a gain of $3.3 million on sales of 90,800 Echostar shares. In the first
quarter of fiscal 1999, the Company realized a gain of $3.2 million on the sale
of Echostar shares.
Other Income. Other income for the second quarter of fiscal 2000 was $5,000
as compared to $128,000 for the same period last year. For the first six months
of fiscal 2000 other income was $10,000 compared to $211,000 for the same period
last year. Other income in fiscal 1999 included a $100,000 payment to the
Company pursuant to a sublease agreement for space at Westinghouse Drive and an
insurance claim payment.
Provision for Income Taxes. The Company's effective tax rate was 0% for the
second quarter and first six months of fiscal 2000, and was 41% and 43% for the
second quarter and first six months of fiscal 1999, respectively. No tax benefit
was provided on the pretax losses during fiscal 2000 due to limitations on net
operating loss carrybacks and a valuation allowance provided on deferred tax
assets due to lack of sufficient assurance that such assets will be realized in
future periods.
8
<PAGE>
LIQUIDITY AND CAPITAL RESOURCES
At March 25, 2000, the Company had working capital of $16.1 million,
including $4.1 million in cash and cash equivalents, compared with working
capital of $12.4 million, including cash and cash equivalents of $3.8 million,
at September 25, 1999.
Net cash used by operating activities was $2.9 million during the first six
months of fiscal 2000 as compared to net cash used of $3.1 million in the same
period of fiscal 1999.
The Company's investing activities provided $3.8 million during the first
half of fiscal 2000 as compared to cash provided of $3.1 million during the same
period in fiscal 1999. During the first half of fiscal 2000, $3.9 million was
realized from the sale of Echostar shares compared with $3.4 million for the
same period last fiscal year.
The Company's financing activities used $671,000 during the first half of
fiscal 2000 as compared to net cash used of $2.2 million during the first half
of fiscal 1999. In fiscal 2000, net payments under debt obligations of $968,000
were partially offset by cash received from issuance of common stock pursuant to
employee benefit plans. The Company reduced convertible debentures by $1.2
million and other debt obligations by $1.0 million in the first half of fiscal
1999.
At March 25, 2000, the Company's principal sources of liquidity consisted
of $4.1 million in cash and a bank line of credit. The credit facility allows
for borrowings up to the lesser of $5.0 million or 80% of qualifying
receivables. Qualifying receivables exclude certain receivables from the U.S.
government, certain uninsured foreign accounts and delinquent receivables. The
average total balance available to be borrowed under the line during the second
quarter of fiscal 2000 was approximately $1.2 million. At March 25, 2000, a
total of $1.3 million was available under the line of credit and no balance was
outstanding. Additionally, a principal source of financing is the Company's
holdings of Echostar common stock, which is subject to the volatility of the
stock market. At quarter end, the Company held 111,344 shares of Echostar stock
with a value of $8.5 million and an unrealized gain, net of tax, of $4.6 million
recorded in stockholders' equity.
SSET expects to continue to incur quarterly losses until iP3(TM) products
are shipping in significant volume. At the level of operations experienced
during the second quarter, the Company estimates that it will have used all of
its currently available capital resources by the end of the second quarter of
fiscal 2001. SSET will need to increase revenue significantly in a relatively
short period of time in order to attain breakeven cash flow from operations with
its existing capital. If the Company cannot generate a significant increase in
revenues and gross profit or obtain additional funding, SSET would be unable to
continue as a going concern. Many factors could increase or decrease SSET's
utilization of its capital resources such as changes in product development
schedules and expenses, greater than anticipated time or costs to manufacture
sufficient quantities of new products, and greater than anticipated expenses.
Further, the value of short-term investments could decrease. Management cannot
predict the timing or the magnitude of these factors with any degree of
certainty. Therefore, there can be no assurance that cash and cash equivalents,
short-term investments, and available line of credit balances as of March 25,
2000, will be sufficient to meet our capital requirements through the second
quarter of fiscal 2001. SSET may need additional funding at an earlier date.
There can be no assurance that additional financing will be available, or if
available, will be on reasonable terms. Further, any financing may be materially
dilutive to our shareholders. If SSET is unable to obtain additional financing
on a timely basis when and if needed, the Company will be required to reduce or
even terminate its operations.
RISK FACTORS
SSET's business faces significant risks. If any of the events described in
the following risks actually occurs, SSET's business, financial condition and
results of operations could be materially and adversely affected. These risks
should be read in conjunction with the other information set forth in this
report. The risks and uncertainties described below are not the only ones facing
SSET. Additional risks and uncertainties not presently known to the Company, or
those currently considered immaterial, may also harm the Company.
9
<PAGE>
Market Acceptance of Products
The market for SSET's products is subject to technological change, new
product introductions and continued market acceptance. Current competitors or
new market entrants may develop new products with features that could cause a
significant decline in sales, price reductions or loss of market acceptance of
SSET's existing and future products. SSET's success will depend, among other
factors, upon its ability to enhance its existing products and to introduce new
products on a timely basis. In particular, SSET's future results of operations
will be highly dependent on the successful completion of the design,
development, introduction, marketing and manufacture of its iP^3(TM) platform
which was recently introduced. To date, SSET has made no commercial shipments of
these products. This product line may require additional development work,
enhancement, testing or further refinement before it can be introduced and made
commercially available. If iP^3(TM) has performance, reliability, quality or
other shortcomings, then the product could fail to achieve market acceptance.
The failure by SSET's new or existing products to achieve or enjoy market
acceptance, whether for these or other reasons, could cause SSET to experience
reduced orders, higher manufacturing costs, delays in collecting accounts
receivable and additional warranty and service expenses, which in each case
could have a material adverse effect on SSET's reputation and financial
performance.
Emerging Market For Internet-Over-Satellite Communications
Since approximately the second half of fiscal 1999, SSET has shifted
emphasis away from its previous RF transceiver and modem products to the
development and marketing of Internet-over-satellite products and applications.
The market for Internet-over-satellite communications products is only beginning
to emerge. SSET's future success will be largely dependent on the demand for
Internet-over-satellite communications products in general, and upon SSET's
ability to develop and introduce new products and technologies that meet
customer requirements. SSET faces challenges in demonstrating the value of its
Internet-over-satellite communications products. If SSET is unable to
successfully educate potential customers as to the value of, and thereby obtain
broad market acceptance for, its products, it will continue to rely primarily on
selling existing products to its base of existing customers, which will
significantly limit any opportunity for growth. To the extent that a specific
method other than SSET's is adopted as the standard for implementing
Internet-over-satellite communications, sales of SSET's planned products in that
market segment would be adversely impacted, which would have a material adverse
effect on SSET's business. In addition, the commercial success of SSET's
Internet-over-satellite communications products will depend, in part, upon a
robust commercial industry and infrastructure for providing access to public
switched networks, such as the Internet. The infrastructure or complementary
products necessary to make these networks into viable commercial marketplaces
may not be fully developed, and once developed, these networks may not become
viable commercial marketplaces.
Potential Fluctuations in Quarterly Operating Results
SSET's operating results have fluctuated in the past and may fluctuate in
the future as a result of a number of factors, including market acceptance of
SSET's product line of STAR satellite transceivers and SSET's high speed high
data rate modems, delays in the delivery of SSET's products, delays in the
closing of sales, performance of SSET's suppliers, new product introductions,
such as iP^3(TM), and product enhancements by SSET or its competitors, the
prices of SSET's or its competitors products, the mix of products sold,
manufacturing costs, the level of warranty claims and changes in general
economic conditions. In addition, competitive pressure on pricing in a given
quarter could adversely affect SSET's operating results for such period, and
such price pressure over an extended period could materially adversely affect
SSET's long term profitability. SSET expects that the gross margin for existing
products will continue to be under pressure to decline due to price reductions
as well as continuing competitive price pressure in the satellite
telecommunication equipment market. SSET's ability to maintain or increase net
revenues and gross margin will depend upon its ability to increase unit sales
volumes, reduce manufacturing costs and introduce new products or product
enhancements.
SSET typically ships a substantial amount of its products near the end of
each quarter. Accordingly, SSET's net revenues for any particular quarter cannot
be predicted with any degree of accuracy. In addition, SSET has, in the past,
experienced delays with shipping its products which has caused its revenues and
net income to fluctuate significantly from anticipated levels and from quarter
to quarter. Due to all of the foregoing factors, it is likely that in some
future quarter SSET's operating results will be below the expectations of public
market analysts and investors. In such event, the price of SSET's Common Stock
may decrease significantly.
10
<PAGE>
Product Concentration
Sales of SSET's STAR transceivers accounted for approximately 45% of net
revenues in fiscal 1999. SSET anticipates that its STAR transceivers will
continue to account for a substantial portion of its net revenues during fiscal
2000. Any factor adversely affecting the demand or supply for the STAR
transceiver product line could materially adversely affect SSET's business and
financial performance.
Limited Number of Principal Customers
Sales of SSET's products are concentrated in a small number of customers.
For fiscal 1999, the largest five customers accounted for 40% of sales. SSET
expects that revenues from a relatively small number of customers will continue
to account for a significant portion of revenue through fiscal 2000. There can
be no assurance that SSET will realize equivalent sales from their top customers
in the future. The loss of any existing customer or a significant reduction in
the level of sales to any existing customer could have a material adverse effect
on SSET's business, financial condition and results of operations.
Dependence on Suppliers
SSET's manufacturing operations are highly dependent upon the timely
delivery of quality components, subassemblies, assemblies and other equipment by
outside suppliers. From time to time SSET has experienced delivery delays from
key suppliers which impacted sales. In addition, as was experienced in 1998 and
1997, certain vendor supplied materials may have quality issues which could
impact sales and increase customer support costs. There can be no assurance that
SSET will not experience material supply problems or component issues in the
future.
Competition
The market for satellite telecommunication equipment is highly competitive
and subject to rapid technological change. SSET competes with a number of
companies that manufacture components of satellite earth station systems similar
to those manufactured by SSET. Certain of these companies have substantially
greater financial resources and production, marketing, engineering and other
capabilities than SSET with which to develop, manufacture, market and sell their
products. SSET believes that its ability to compete successfully will depend on
a number of factors both within and outside its control, including price,
quality, delivery, product performance and features, timing of new product
introductions by SSET and customer service and support.
SSET expects its competitors to continue to improve the performance of
their current products and to introduce new products or new technologies that
provide improved performance characteristics. New product introductions by
existing competitors and the entry of new competitors into the satellite
telecommunication equipment market has in the past and may in the future cause
SSET to reduce the prices of its products. SSET expects this increased
competitive pressure to lead to intensified price-based competition, resulting
in lower prices and may result in lower gross margins which would adversely
affect SSET's business, financial condition and results of operations.
Attraction and Retention of Qualified Personnel
SSET's manufacturing and development capabilities are highly dependent upon
hiring and retaining the required technical personnel. In particular, SSET will
need to hire additional qualified engineering and other employees in order to
continue the timely development of its iP^3TM product line. SSET competes for
such personnel with other companies, government entities and organizations. From
time to time SSET has experienced difficulties in recruiting and retaining key
qualified personnel which impacted operations. SSET may experience personnel
resource problems in the future.
Lengthy Sales Cycle
Sales of SSET's products often involve, or are integral components of,
significant capital commitments by customers, with the attendant delays
frequently associated with large capital expenditures. For these and other
reasons, the sales cycle associated with SSET's products is often lengthy and
subject to a number of significant risks over which SSET has little or no
control. SSET is often required to ship products shortly after it receives
orders and, consequently, order backlog at the beginning of any period has in
the past represented only a small portion of that
11
<PAGE>
period's expected revenue. As a result, product revenue in any period is
substantially dependent on orders booked and shipped in that period. SSET
typically plans its production and inventory levels based on internal forecasts
of customer demand, which are highly unpredictable and can fluctuate
substantially. If revenue falls significantly below anticipated levels, as it
has at times in the past, SSET's financial condition and results of operations
would be materially and adversely affected. In addition, SSET's operating
expenses are based on anticipated revenue levels and a high percentage of SSET's
expenses are generally fixed in the short term. Based on these factors, a small
fluctuation in the timing of sales can cause operating results to vary
significantly from period to period. It is possible that in the future SSET's
operating results will be below the expectations of securities analysts and
investors. In such an event, or in the event that adverse conditions prevail or
are perceived to prevail generally or with respect to SSET's business, the price
of SSET's Common Stock would likely be materially adversely affected.
Risks Associated with International Sales
SSET plans to continue to expand its foreign sales channels and to enter
additional international markets, both of which will require significant
management attention and financial resources. International sales are subject to
a number of risks, including unexpected changes in regulatory requirements,
export control laws, tariffs and other trade barriers, political and economic
instability in foreign markets, difficulties in the staffing, management and
integration of foreign operations, longer payment cycles, greater difficulty in
collecting accounts receivable, currency fluctuations and potentially adverse
tax consequences. Since SSET's foreign sales are denominated in U.S. dollars,
SSET's products become less price competitive in countries in which local
currencies decline in value relative to the U.S. dollar. The uncertainty of
monetary exchange values has caused, and may in the future cause, some foreign
customers to delay new orders or delay payment for existing orders. The
long-term impact of such devaluation, including any possible effect on the
business outlook in other developing countries, cannot be predicted. SSET's
ability to compete successfully in foreign countries is dependent in part on
SSET's ability to obtain and retain reliable and experienced in-country
distributors and other strategic partners. SSET does not have long-term
relationships with any of its value added resellers and distributors and,
therefore, has no assurance of a continuing relationship within a given market.
Item 3. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
As of March 25, 2000 the Company had 111,344 shares of Echostar common stock
with a closing price on that date of $76.125. As of April 25, 2000, the closing
price was $58.375. The 52 week range for Echostar's common stock as of April 25,
2000, giving retroactive effect to stock splits, was a low of $10.25 and a high
of $81.25.
At March 25, 2000, the Company was operating under a bank credit facility with
no outstanding borrowings. This facility allows for borrowings up to the lesser
of $5.0 million or 80% of qualifying receivables. Funds borrowed under this
line-of-credit bear interest at prime plus 2.00% (prime rate was 9.00% at March
25, 2000). Certain assets of the Company secure the line-of-credit and the
Company is required under this line-of-credit to be in compliance with a
tangible net worth covenant. The credit agreement expires July 30, 2001.
The Company's exposure to market risk due to fluctuations in interest rates
primarily relates to the Company's credit facility. If market interest rates
were to increase immediately and uniformly by 10% from levels prevailing at
March 25, 2000, the fair value of the debt obligations would not change
materially. The Company does not use derivative financial instruments to
mitigate interest rate risk.
Notwithstanding the analysis of the direct effects of interest rate risk, the
indirect effects of fluctuations could have a material adverse effect on the
Company's business, financial condition and results of operations. For example,
worldwide demand for the Company's products could be affected by interest rate
fluctuations that could change the buying patterns of the Company's customers.
12
<PAGE>
PART II - OTHER INFORMATION
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
(a) The Registrant's Annual Meeting of Shareholders was held on March 15,
2000. The vote of holders of record of 5,923,377 shares of SSET's common
stock outstanding at the close of business on January 18, 2000 was
solicited by proxy pursuant to Regulation 14A under the Securities Act
of 1934.
(b) The following directors were elected at the Annual Meeting:
For Withheld
--------- --------
Leon F. Blachowicz 4,725,797 390,942
Frank Trumbower 4,735,797 380,942
Daniel E. Moore 4,402,897 713,842
Joseph T. Pisula 4,725,897 390,842
Lawrence W. Roberts 4,725,897 390,842
D. Jonathan Merriman 4,725,897 390,842
Olin L. Wethington 4,725,897 390,842
(c) Other matters voted on at the Annual Meeting were the following:
(i) To approve SSET's 1997 Equity Participation Plan, as amended, to
increase the aggregate number of shares of common stock authorized
for issuance under such plan by 400,000 shares.
For 1,948,562
Against 760,049
Abstain 3,727
Broker non-votes 2,401,401
(ii) To approve SSET's 1997 Directors' Stock Option Plan, as amended,
to increase the aggregate number of shares of common stock
authorized for issuance under such plan by 100,000 shares,
increase the annual grant from 2,500 to 5,000 shares of common
stock and provide for an initial appointment grant of 10,000
shares of common stock.
For 1,927,773
Against 762,413
Abstain 22,152
Broker non-votes 2,404,401
(iii) To ratify the selection of Deloitte & Touche LLP as independent
auditors of the Company for its fiscal year ending September 30,
2000.
For 5,079,562
Against 28,500
Abstain 8,677
(iv) To approve the issuance of stock option to Mr. Trumbower.
For 1,878,703
Against 803,873
Abstain 29,762
Broker non-votes 2,404,401
13
<PAGE>
Item 6. EXHIBITS AND REPORTS ON FORM 8-K
<TABLE>
(a) Exhibits included herein (numbered in accordance with Item 601 of
Regulation S-K)
<CAPTION>
Exhibit Number Description Sequential Page Number
- -------------- ----------- ----------------------
<S> <C> <C>
27 Financial Data Schedule Page 16
(b) Reports on Form 8-K
None.
</TABLE>
14
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned hereunto duly authorized.
Dated: May 9, 2000 SSE TELECOM, INC.
By: /s/ Leon F. Blachowicz
--------------------------
Leon F. Blachowicz,
Chief Executive Officer
By: /s/ James J. Commendatore
-------------------------
James J. Commendatore,
Chief Financial Officer
15
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<FISCAL-YEAR-END> Sep-30-2000
<PERIOD-START> Sep-26-1999
<PERIOD-END> Mar-25-1999
<PERIOD-TYPE> 6-MOS
<CASH> 4074
<SECURITIES> 8476
<RECEIVABLES> 4049
<ALLOWANCES> 523
<INVENTORY> 3741
<CURRENT-ASSETS> 22848
<PP&E> 11,804
<DEPRECIATION> 9981
<TOTAL-ASSETS> 24811
<CURRENT-LIABILITIES> 6774
<BONDS> 0
0
0
<COMMON> 62
<OTHER-SE> 13983
<TOTAL-LIABILITY-AND-EQUITY> 24811
<SALES> 8816
<TOTAL-REVENUES> 8816
<CGS> 8160
<TOTAL-COSTS> 5650
<OTHER-EXPENSES> (3342)
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 20
<INCOME-PRETAX> (1672)
<INCOME-TAX> 0
<INCOME-CONTINUING> (1672)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (1672)
<EPS-BASIC> (0.28)
<EPS-DILUTED> (0.28)
</TABLE>
